Greenness in commodity trading

On the one hand, many commodities are driving the green transition, which transfers into an increasing demand for commodities that promote clean energy, like green lithium, as well as sustainably sourced and ethically produced commodities such as responsible cocoa or palm oil.

On the other hand, commodities can also be negatively affected by the green transition through physical risks like climate-related extreme weather events destroying agricultural products and a decreasing demand for commodities which do not support or are negatively affected by the green transition such as fossil fuels. Furthermore, ESG breaches result in financial losses, reputational damage and litigation costs.

There are increasing calls from the regulators and the industry for more ESG integration in the commodity business.

• The trend for heavier regulation of transactions for commodity derivatives and emissions allowance is expected to continue in the upcoming years, increasingly under consideration of ESG.
• Regulators and supervisors around the world are looking into the new challenges of the commodity trading market in relation to ESG.
• The biggest commodity players commit to more transparency on sustainability matters such as TCFD reporting and increasingly set ambitious targets towards decarbonisation.

• Industry-specific ESG standards and certifications for commodity producers are gaining in importance.
• Commodity stock exchanges look into ways to drive ESG innovation.

Clearly, the financial industry also has its role to play in the sustainable transition. As financial institutions are facing a true green regulatory tsunami, they’re passing their own obligations to other stakeholders in the commodity trading market, which will have tremendous implications for the crucial funding for commodity trading. 

One of the core regulatory developments around sustainable finance is the EU taxonomy. It has implications on various areas around commodities and commodity trading such as:

• The classification of economic activities around commodities (e.g. sourcing and production, transportation)
• Mandatory taxonomy disclosure obligations for large commodity producers and commodity trading companies (in scope of NFRD / CSRD)
• Implications for funding and trading (e.g. taxonomy-aligned loan KPIs).

Moreover, the taxonomy plays a key role in the greening of the commodity business.